Category: Trusts

One of the most sensitive issues in family trusts is what happens when our parents or other loved ones have succumb to dementia or other debilitating illnesses that reduce their ability to handle their financial affairs in a responsible manner. While it is important to stay vigilant in these circumstances most persons will not want to admit they are suffering from limited capacity and will not desire to give up control and management of their own property. Undisputedly, it is in their best interests for someone to have authority to step in when the need arises but often the act of assuming control of a loved ones property is not thought out very well when the trust is drafted.

In some cases, a parent or loved one can resign as trustee before their illness progresses further as long as the resignation is voluntary and knowing. However, in many cases that is not always an option. While a reluctance to give up control over ones own property is certainly understandable, forces ranging from mismanagement of assets to elder financial abuse necessitate some form of action to protect the parent or loved one and their property.

Often the attorney drafting the trust will explain these issues when the trust is drafted and the person will select provisions to address how trustee removal is handled when the person is no longer competent to act but might not recognize or acknowledge the incapacity. Options include the naming of a family member or friend who can make a determination of a lack of capacity or require an affidavit of one or more physicians to make a determination. While requiring an affidavit of one or more physicians is attractive, it can be expensive and time consuming. Furthermore, as a result of medical privacy laws the trust instrument must specifically authorize the physician or physicians to discuss the person’s medical condition with third parties.

If a family member or other party who is also a beneficiary is granted authority to remove the trustee care must be taken to ensure that that person does not have power to name a successor trustee, otherwise the IRS may deem that person to hold a general power of appointment over trust property depending on the distribution powers set forth in the trust and held by the successor trustee. When drafting provisions along these lines competent legal advice is paramount to avoid unintended tax consequences.

When the trust document is silent as to removal of an incapacitated trustee and the trustee is not capable of executing a knowing and voluntary resignation matters become more difficult. In this case, family members will have no choice but to hire an attorney and petition the court for removal of the trustee based on grounds that the trustee is unfit to administer the trust and substantially able to manage the trust assets and exercise their duties as trustee.

Having a revocable trust is an essential part of good estate planning. However, it doesn’t stop there…good estate planning also encompasses very thorough planning and decision making about which assets are to be held in the revocable trust and the process for which to transfer those assets to the trustee of the revocable trust.

One of the benefits of using the revocable trust is that upon the death of the property owner the property passes by operation of law to the next named trustee, to be managed and/or distributed as the property owner established in the terms of the trust without the involvement of a probate court or other court procedures. This saves significant amounts of money and time and keeps the nature and scope of the assets private.

The problem is, what happens when a property owner dies before transferring those assets intended to be held in trust to the trustee. In most cases the remaining family members had to probate the will if other means were not available to handle the distribution of the property. One of the most common assets often left out the trust is real estate. Or in some cases, parties will prepare a trust, convey the house to the trustee and later on refinance their home mortgage. Quite often the mortgage lender would require that the home be conveyed out of the trust and the loan closed in the owners name individually. The mortgage officers always tell their borrowers to have the house conveyed back into the trust after the escrow closes but unfortunately that doesn’t always happen and this is not discovered until the property owner has passed.

Fortunately, the California Court of Appeal issued a ruling in 1993 providing some relief for those who failed to convey property to their revocable trust before passing in the case Estate of Heggstad (1993) 16 Cal.App.4th 943. In that case, Mr Heggstad executed a revocable trust and attached to the trust a Schedule A, specifically identifying property that was to be held and owned by the trust. Included in the Schedule A were several pieces of real estate that were identified with either an address or other descriptive information. During his lifetime, Mr. Heggstad never signed a separate deed conveying the parcels of property to his revocable trust.

After his death, disputes arose as to whether the real estate was held in trust or not due to the lack of a separate deed. Essentially, the Court ruled that because Mr. Heggstad named the properties in his trust, sufficiently described them and expressed his intent that they be held in trust, the lack of a deed did matter as relevant principles of law dictated that the property was in fact owned by the trustee. This has led to many attorneys filing “Heggstad Petitions” on behalf of their clients when someone dies without transferring real estate to their revocable trust as long as it was sufficiently identified in the revocable trust document as being held in trust.

While the Heggstad Petition is very useful it only works when the property is real property that was never conveyed to the trustee and does not apply when the property at hand is personal property. However, in 2011 the California Court of Appeal handed down another decision that expands the underlying premise of the Heggstad case and applies it to personal property with a few twists. The case, Kucker v. Kucker involved a property owner that executed a general assignment, assigning all of their personal and real property to their trust. Upon Mr. Kucker’s passing his heirs discovered several shares of stock that were never assigned to the trustee during Mr. Kucker’s lifetime. Therefore, his heirs filed a petition with the Superior Court seeking a determination, in part, that as a consequence of Mr. Kucker signing a general assignment, assigning his personal and real property to the trustee, the stock was actually held in trust even though a separate assignment, specifically identifying the shares was never signed. In part, the Court held that a general assignment, duly executed buy the property owner is sufficient under law to act as an assignment of the property to their revocable trust.

As a result of the Heggstad and Kucker cases, practitioners have strong tools for assisting clients in avoiding full probate administration when clients have failed to convey property to themselves as trustee. Heggsatd can be used for real property when it is specifically identified in the trust document and Kucker can be cited when personal property is generally described in the trust document or in an generl ssignment. However, until recently, these tools were not much help when the client owns real property that was never deeded to the trustee and only mentioned in the trust and not specifically described well enough to determine the property without referring to extrinsic evidence outside of the trust document.

This month, the California Fourth District Court of Appeal has ruled in the case Ukkestad v. RBS Asset Finance, which expands and clarifies on the holdings in the Heggstad and Kucker cases. In this most recent case, Mr. Ukkestad owned two pieces of property that were assigned to the trustee via a general assignment in the revocable trust rather than a separate deed. Furthermore, the trust assignment did not identify the pieces of real estate with specific identifying information. After his death, the parties filed a petition with the Superior Court seeking an order that Mr. Ukkestad’s two pieces of property were held in the trust despite the fact that a deed was never signed based on the holdings in the Heggstad and Kucker cases. Expanding on the prior cases the Court has now held where evidence outside of the trust exists, it can be used to specifically identify real property that is subject to a general assignment and thus held in trust in the absence of a deed.

While these cases are beneficial they still require loved ones to hire attorneys and file petitions for relief and should not be relied upon when undertaking estate planning. Taking the extra time to adequately address trust funding and other techniques for avoiding probate courts will make settling your estate that much easier for those who are left behind and charged with responsibility of doing so.

Implementing a revocable trust is the foundation of any good estate plan and most if not all persons undertaking estate planning should not be without one. The trustee of the revocable trust is the person who manages the trust property akin to a chief executive of an organization. In most cases the person creating the revocable trust is named as the initial trustee and will perform that role for many years without much difficulty. The problem arises when the person who created the trust and is serving as the initial trustee dies or suffers and accident or disability that renders them incapacitated and unable to serve.

When the revocable trust is prepared, detailed provisions should be incorporated in the trust document providing for a successor trustee to assume the office and perform the functions when the initial trustee is no longer able. The person creating the trust should nominate others to serve as successor trustees when that time comes. However, many times suitable candidates may not come to mind due to factors such as family members that are not capable of performing the role for one reason or another and a lack of acquaintances that are not good candidates for nomination. Furthermore, sound estate planning warrants that more than one person should be named as successor trustee if the first person nominated is not able to serve.

In that event a professional trustee or professional fiduciary may be a beneficial option for a successor trustee of the revocable trust. A professional fiduciary is a person who performs trustee duties and other fiduciary roles as an occupation. In California, professional fiduciaries are licensed and regulated by the Department of Consumer Affairs Professional Fiduciaries Bureau. Additionally, many are members of professional associations and some carry either errors and omission insurance or professional liability insurance. Due to the personal nature of fiduciary services any person considering a professional trustee for their revocable trust should interview several candidates and satisfy themselves as the financial strength, talents, skill, veracity and professionalism of those under consideration.

An important aspect of using a trust is ensuring that the trust is properly funded with assets that are appropriate for being held in trust. While not all assets should be held in trust, particularly those with a tax deferral aspect, most bank and financial accounts should be properly funded in the trust by conveying title of the assets to the trustee. This entails reaching out to the bank or financial institution and transferring existing accounts to the trustee or in some cases re-opening the accounts in the name of the trustee depending on the bank or financial institution’s policies.

Often the bank or financial institution will ask for a copy of the trust. While the question is legitimate so that the financial institution can verify the trustee, its powers and validity, this is an intrusion upon the assets owners privacy and unnecessary. Under the probate code, the asset owner who is desirous of retitling assets in the name of the trustee may present the financial institution with a certificate of trust in lieu of providing a complete copy of the trust instrument.

A certificate of trust is a signed summary of the trust and its relevant terms. At a minimum, the certificate should set forth the name of the person or persons who created the rust, the name of trustee, the tax identification number of the trust, the power of the trustee and whether or not the trust has been revoked or modified. The important matter is that those provisions of the trust that address disposition of the trust assets and distributions do not have to be disclosed and may remain confidential.

Under certain circumstances any bank or financial institution who refuses to accept a properly completed certification and instead demands the trust itself may be sued for damages and attorney fees related to the refusal to accept the certification. While the bank or financial institution has legitimate concerns, anyone outright demanding a complete copy and refusing to accept a certification that complies with law should be seen as probably a good sign that the particular bank or financial institution will not be the best choice in terms of cooperation and ease to work with for the trust accounts. In those cases the trustee should look elsewhere for banking and financial services.

The selection of the right person or institution is key to having a successful trust and is often overlooked when the trust is created. Typically the person who creates the trust will serve as the initial trustee which works well for most and during the period which the trust is revocable. However, what happens when that person passes or suffers a disability or accident that renders them incapacitated is where things become more challenging. At that time the party designated as a successor trustee will succeed to the office and perform the functions and duties as outlined in the trust document and be subject to fiduciary duties imposed by law.

Too many times, parties will name family members or acquaintances without giving much thought to the responsibilities placed upon that party and whether they are capable of performing the duties competently or without reservation. As a general rule, the party selected must have some degree of business acumen and discipline to address pressing issues that arise in administering the trust. An anecdote that I often use with clients is if they are considering naming someone as a successor trustee but when they visit that person and they have weeks of unopened mail unattended to then they probably aren’t the best choice for a successor trustee.

As a guide, the person selected must be able to take all actions that you would normally take in your place, such as paying bills, monitoring investments, filing tax returns, making payments for the benefit of loved ones, addressing insurance concerns and running a business if necessary. Additionally, the probate code places numerous responsibilities on a successor trustee such as proving notices, accounting to beneficiaries and allocating income and expenses among assets held in the trust.

California law imposes numerous fiduciary duties on the trustee, a breach of which can lead to personal liability for the trustee. Therefore the person designated must be capable of diligently performing their role as trustee and willing to do so in a responsible manner. Of additional concern is the makeup of the family members and family dynamics. Are there family members who may be more difficult than others? Is the person named able to handle difficult persons or act impartially amongst the interested persons? If the answer is yes then prudence dictates that selecting a professional trustee or trust company may be the best choice.

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Any and all information provided herein is for informative purposes only and is not legal advice, a solicitation or guarantee regarding the result of any representation or client engagement. Complex legal and tax issues are not fully developed herein as applied to a specific set of facts and or circumstances and therefore should not be relied upon by any reader for any purpose. No attorney client relationship is created herein and as such you should not submit any confidential information to our firm via this website or related email as any information submitted will not be held confidential or privileged unless and until the firm is hired via a written engagement agreement to represent you. Mark T. Bradshaw P.C. practices only in California and does not represent parties unless California and/or Federal law control and does not seek to represent anyone based solely on a visit to this website.

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About Mark T. Bradshaw

Mark Bradshaw practices law in San Diego focusing primarily on estate planning, probate, trusts, wills, guardianship/conservatorship, business law and tax. Prior to founding his own firm he spent the first fifteen years of his career as a title and escrow attorney.